New California Law Makes Owners Responsible For Service Providers' Legal Vioations

Herb Meyers of Pircher, Nichols & Meeks
California Centers – August issue
August 1, 2004

If you own property, watch out. If your service providers don’t have enough resources to comply with the new California Labor Code law, you’re responsible. Anyone connected to property -- property owners, developers and property managers -- should take note. As of January 1 of this year, a new section of the California Labor Code, now holds individuals or companies receiving these services – such as gardening, janitorial, or other maintenance -- may be responsible for the vendor’s insufficient resources, if they do not comply with the law.

For instance, liability can arise when a property owner contracts with a maintenance company to perform janitorial work at a shopping center, but the maintenance company fails to maintain workers compensation insurance for its employees or does not comply with wage and hour laws. When one of the maintenance company employees is injured or fails to receive the wages due, under this new law, the employee may seek recourse against its employer as well as the property owner.

Why Now?

The purpose of this law is to prevent violations of minimum wage, workers’ compensation and other labor laws by requiring the service recipient (ie: property owners or developer) to determine, on an ongoing basis, whether the vendor or contractor has the financial ability to comply with those laws. When Governor Gray Davis signed the legislation, he expressed concern about “unscrupulous employers in the underground economy who fail to abide by minimum labor standards and pay little taxes.”

Overview of the New Law
The scope of the law is broad and the means of satisfying its requirements is uncertain. No longer can a property managers or developers rely on the independent contractor status created by the contract as insulation from violations of law by the vendor. For example, the law gives the vendor’s employees the right to sue for the greater of: (1) the employee’s actual damages, (2) 0 per employee per violation for the first violation and (3) ,000 per employee for additional violations. While an employee, who successfully brings a claim under the statute, is entitled to recover attorney’s fees, even if the developer or property manager is successful in defending against a claim under the statute, it may not recover attorney’s fees from the plaintiff. In addition, the California Labor Commissioner may also have jurisdiction to enforce the law.

How This Law Works
There are ways, however, to protect yourself. A property manager should not enter into a service contract if he/she “knows or should know” that the contract does not provide sufficient funds for the vendor to comply with applicable laws. According to the law, “knows” is defined in the statute to include knowledge “arising from familiarity with the normal facts and circumstances of the business activity engaged in, that the contract or agreement does not include funds sufficient to allow the contractor to comply with applicable laws.” “Should know” is defined to include the “knowledge of any additional facts or information that would make a reasonably prudent person undertake to inquire whether…[the] agreement contains sufficient funds to allow the contractor to comply with applicable laws.” The failure to request or obtain information required by any statute or the agreement “constitutes knowledge of that information.”

The law will hold even though you didn’t receive any pertinent information from the vendor. Therefore, an owner, developer or contractor may be responsible for information which it “should have” been aware of, based on its general knowledge of the industry or because of statutory requirements, regardless of whether or not it actually received the pertinent information from the vendor. For example, if a prospective vendor bid is s significantly less than other bidders for a service contract, a plaintiff employee of the vendor may later assert liability against the owner or developer on the basis that the vendor should have known that the low bid would not have enabled the owner to make a profit without violating applicable wage, hour or worker compensation laws.

There is a presumption that the knowledge requirement has been satisfied if exhaustive information about the vendor is stated in the contract, including the their tax ID number, liability insurance information, the vehicle identification numbers of the vehicles to be used, the number of workers and amount of wages to be paid and a list of the applicable licenses required for the work.

However, obtaining all of the required information will not immunize the owner or developer from liability if, despite the information provided, they knew or should have known that the vendor would not have sufficient funds to comply with minimum wage and all other applicable laws. In addition, there is an ongoing duty to update contract information whenever the contract is “materially” amended. The only exemptions from the law are for homeowners and labor contractors providing services pursuant to a union bargaining agreement.

Cautionary Steps to Follow
Businesses should be aware that liability under this law might be derived from direct or indirect service contracts. For example, owners of real property frequently enter into service contracts indirectly by hiring construction managers or property managers, who then contract with others on the owner’s behalf.

To protect against the penalties and other consequences of violating the statute, owners and others contracting with vendors should update their contracting procedures and contracts to comply with this statute. Specifically, owners and property managers should perform and document an investigation about the vendor’s business practices and financial capacity before entering into the service contract. This investigative document should include a representation by the vendor that it has sufficient funds to comply with all applicable laws, and should include an indemnity protecting the owner from any liability as the result of any claim that the vendor failed to comply with any applicable law. If the vendor does not have significant assets, the owner or developer should also consider requiring the vendor to back up the indemnity with a personal guaranty.

The steps above, if followed, will provide some comfort for owners, property managers, developers and others, but will not avoid potential liability entirely. The overall effect of this statute remains uncertain because of its breadth and the various ways in which it may be enforced.

About the Author: Herb Meyers is an attorney in the Los Angeles office of Pircher, Nichols & Meeks. Founded in 1983, the law firm is nationally recognized with a diversified real estate practice that includes transactional work as well as litigation, bankruptcy, corporate and tax expertise.